Selling 51% of Smith Barney only makes sense if Citigroup is going to sell 100% of Citibank (i.e., the rest of the firm) as well.

We know, or at least think we know the following:

• Citi isn’t desperate for capital. They just got a huge chunk from us taxpayers.

• They aren’t getting much cash in this deal, reportedly less than $3 billion. A pittance in the scheme of Citigroup.

• This doesn’t unload any troubled assets.

• Smith Barney is a reliable earnings producer.

Selling Smith Barney doesn’t solve any of their problems. It neither raises any capital to speak of, nor does it unload bad assets. And why sell now? Supposedly they are going to book some $10 billion in gains on the sale, but so what? No one is fooled into thinking that’s real capital right? Valuation on the brokerage unit is got to be at all-time lows!

In fact, by selling Smith Barney, Citi is giving away deposits. Many Smith Barney clients use Citibank deposit accounts as a sweep vehicle. I haven’t seen numbers on this, but a friend of mine who works confirms this is very common.

Citigroup isn’t doing this to focus on its classic banking division, because Citi has been more of a investment and commercial bank than a retail bank for at least 15 years. This would be reversing a generation’s worth of “progress” toward transforming Citibank. Citi doesn’t have the branch network to suddenly become a serious competitor with Bank of America or Wells Fargo.

But it all starts to make sense if you assume that the rest of Citi is also for sale. Say the buyer is Goldman Sachs, who doesn’t want Smith Barney’s 14,000 brokers or their back office or their compliance headaches, etc. Goldman just wants the big fat bank and its deposit base to give them secure funding. To me I’d rather see Goldman buy up smaller banks with less baggage, but maybe Goldman expects some government help?

I just have the feeling there is more going on here than just Smith Barney.